Can impact investing transform SA’s retirement funds?

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SIMON BROWN: I’m chatting with Zeyn Ismail, Portfolio Manager of Fixed Income Private Markets at STANLIB Asset Management. Zeyn, appreciate the time. ‘Impact investing’ is a phrase I think many of my listeners have heard. It’s also a phrase I think a lot of folks are not au fait with exactly what it is. So let’s start with a simple question: what is impact investing?

ZEYN ISMAIL: Simon, thanks for having me on the show. Impact investing in a nutshell is an investment approach that aims to generate a positive social and environmental outcome while generating a compelling financial return for investors. So it is developmental in nature but without having to concede on returns.

You may know that concessionary finance is usually the domain of developmental finance institutions and philanthropic foundations, while impact investing is directed at commercial investors. Some of the main themes include climate change – obviously a big consideration, improving the quality of life for individuals. So we’re talking about quality housing, access to quality education, access to healthcare.

And then another big theme is financial inclusion, ensuring that a greater component of the population is able to access finance with a view to improving their future prospects.

SIMON BROWN: I get you. My question is then going to be: Do and should retirement funds allocate capital to impact investing? I want to switch it because my sense is they absolutely should because they get the return, which is important for a retirement fund. But doing societal good makes you feel nice in your heart, but actually doing good for society is good for the broader society, economy and hence the retirement funds.

ZEYN ISMAIL: Yes, absolutely. I do think that they do invest in impact investments. Do I think that they’ve done enough investments into it? No. So I think there’s still significant scope. I’ll give you a sense of the opportunity set a little later on.

But there are two reasons that stand out to me for retirement funds to consider investments into impact investments. They are typically quite concentrated on traditional listed equities and bond markets – for obvious reasons. Issues in this space have made significant strides in terms of ESG, but that does not necessarily translate into tangible societal uplift, certainly not in the short term.

In addition to this, listed markets we know can be quite volatile. And so over time I think it’s fair to say that equities and bond markets have also become more correlated. Hence, globally you have seen a shift towards an increase in allocation towards alternative investments, and South Africa is lagging behind international norms on this front.

Now, impact investing is a form of an alternative asset. Whether it’s private equity or private debt, the behaviour of the underlying investments differs from the traditional asset classes we’ve mentioned. So you’ve got an opportunity for a lower-beta asset class in the first instance. Then you’ve got potential to generate alpha, so outsize returns. And critically to your point, you give life to tangible impact. That’s the first reason.

It’s just a good diversifying asset class that gives you this tangible benefit for your communities. Okay.

Secondly, and coincidentally, the majority of retirement fund beneficiaries in SA happen to represent that cohort of the population that stands to benefit from the type of assets that it targets through impact investing.

A good example. One of the biggest focus areas for us is access to quality affordable housing. Whether it’s ownership or rental, the vast majority of the target market is nurses, teachers, municipal workers, members of the security and policing clusters.

So retirement funds have an opportunity to influence and benefit from investments that are directly linked to their members. It’s our view that when an investor lines their portfolios with their values and strategic priorities, it fosters a sense of purpose alongside profitability.

SIMON BROWN: I get that, absolutely. And I like that. It is that sort of ‘in sync with each other’. To put it in perspective, how big is the opportunity set locally in South Africa?

ZEYN ISMAIL: It ‘s a good question, but also not an easy one to answer to be honest, because impact investing straddles multiple sectors and credible data is notoriously difficult to come by, especially in a South African context.

But let’s use a few kind of examples based on some basic research, and I’ll reference live transactions to illustrate the scale. So we’ll just reflect on two. Access to energy, because a big talking point is that produces 42GW of power at present – somewhere in that region. SA is a high energy-consumptive country and, given our population growth and then given the investments required to facilitate economic growth, the projection suggests that we’re going to have to increase capacity by 50% over the next decade.

A large percentage of that energy – I think in the high 80s – is produced using coal, which isn’t sustainable if we want to meet our various climate-change objectives. Hence the move into renewable energy over the last decade-and-a-half.

And in terms of South Africa’s Integrated Resources Plan government is looking to invest into 9GW of solar power and as much as 18GW of wind power over the next five years. Those are substantial amounts.

To give a sense of the actual rand value at play, take a live transaction we are looking at, at present. We’re currently exploring an investment into a solar plant that will produce in the region of about 240MW of power.

Now, this is considered a large renewable energy project. The total project costs are estimated to be R4.5 billion. But in order to achieve the nine gigawatts of power generation I mentioned earlier, you’ve got to initiate almost 40 such projects – or, put differently, R170 billion of investment into solar projects alone over the next five years.

SIMON BROWN: Those are staggeringly large numbers. I hadn’t actually thought about breaking it down that way. And there are other areas. There’s health. There’s a ton of others which are going to be giant as well.

Then where does the asset manager fit in this? To your earlier point, for example, the retirement funds are typically focused on unlisted space as well. Where’s the asset manager driving this impact?

ZEYN ISMAIL: Like ourselves, you do get private markets’ asset managers out there or even traditional asset managers who have a focus on alternatives. And your private markets’ asset manager plays the role of mobilising vast amounts of money needed to build infrastructure faster than any individual, government or company or DFI [development finance institution] or bank can provide.

The truth is the scale of the investments required is such that we need various public- and private-sector institutions to get involved.

The other aspect to consider is that investments carry risks – which is why it’s essential to use an investment manager who performs thorough due diligence. They need to regularly assess and report on performance of the underlying investments; they’ve got to have clear legal agreements in place to manage underperformance or, at worst, defaults. And because private markets investments are unlisted and thus not readily observable, the manager needs to make an initial and ongoing assessment of recoverable values throughout the life of the investment.

SIMON BROWN: Absolutely, because it does come back to you; as you say, it is that unlisted space.

We’ll leave it there. Zeyn Ismail, portfolio manager for fixed-income private markets, STANLIB Asset Management, I appreciate the time.

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